ProjectFinance andGuarantees September 1996 Resource Mobilization and Cofinancing Vice Presidency Project Finance and Guarantees Group World Bank Guarantee Catalyzes Private Sector Investment for Uch Power Project In Pakistan Project Overview The Uch Power Project is the first Partial Risk The power generated will be sold to the Water and Guarantee operation since the mainstreaming of Power Development Authority (WAPDA) on the the Bank's Guarantee Program in 1994, and the basis of a twenty-three year Power Purchase second such operation after the Hub Power Project. Agreement (PPA). The power station will use low The Project has been precedent setting in terms Btu-gas from the nearby Uch gas field to be "Because of the relatively large fi- of a Bank Group approach to the financing of supplied by the Oil and Gas Development nancing of the Uch Power infrastructure projects. This landmark collaboration Corporation (OGDC), the national oil and gas Project, the participation of the between the Bank and IFC demonstrates the way company, on the basis of a twenty-three year Gas Bank and IFC were critical to the both institutions are able to leverage their Supply Agreement (GSA). Under the terms of the mobilization of private sector fi- respective strengths for the benefit of the client agreement, OGDC will be responsible for nance. The Uch Power Project country. The Bank's partial risk guarantee helped developing the Uch field as well as supplying the promotes private sector participa- mobilize a US$75 million syndicated commercial natural gas to the plant through a 50-km pipeline. tion in the power sector and will bank loan for a 15 year term - the longest maturity Among power projects in Pakistan, this Project is help alleviate electricity short- to date for a commercial financing for Pakistan. In unique in that it will rely entirely on a plentiful, ages through the efficient use of conjunction with the guarantee, a US$10 million indigenous fuel source. The Uch field was domestic resources", Richard World Bank loan was provided through the Private discovered in 1955 but abandoned because of the Frank, World Bank Managing Di- Sector Energy Development Fund (PSEDF), set low energy content of the gas. Technological improvements in gas turbines over the last 20 rector. up in Pakistan in 1988, which helped to catalyze funding from bilateral donors of around US$188 years have enabled them to run reliably on low-to- million. The IFC, on its part, was able to mobilize medium-Btu gas, and in the mid-1980s interest was the largest IFC `B' loan for Pakistan of US$75 rekindled in developing the Uch field. As the Project million. Both the Bank and IFC worked as part of will utilize indigenous gas with no alternative a Project team along with the lenders and sponsors economic use, it is considered by the Government which enabled them to operate well within the as a priority Project. This is also consistent with the Sponsor's timetable for Financial Closure. Bank's country assistance strategy for Pakistan, as it will not only alleviate electricity shortages through The Project, which consists of a gas-fired the efficient use of domestic resources but will conventional combined cycle plant with an installed promote private sector participation, thereby capacity of 586 megawatts located in Pakistan's reducing reliance on the Government's scarce Baluchistan Province, will be implemented on a budgetary resources. Build-Own-Operate (BOO) basis. Due to the relatively large financing requirement of US$ 690 Sector Background million (including standby finance), the participation of both the Bank and IFC was critical to the Since the mid-1980's, Pakistan has taken vigorous mobilization of $530 million in long-term debt steps to reform and develop its energy sector as finance. All potential sources of funds in the form developing Pakistan's energy sector is critical to the of export credits and IFC `A'and `B'Loans had been country's economic growth. The Bank and the IFC maximized prior to an approach to the Bank, as have worked together with the Government in `lender of last resort'to help catalyze the funding of defining a greater role for the private sector in the the balance of the financing requirement through country's power generation, transmission, and the Bank guarantee. Uch reached financial closure distribution activities. The Government's far- in May 1996 and construction is expected to be reaching institutional and policy reform program completed by December 1997. includes: creating new institutions to encourage the ProjectFinance construction of power plants by the private sector, The Project is estimated to cost around US$690 andGuarantees promoting energy conservation, reforming energy million, including contingencies of US$60 million. prices, and restructuring of the sector entities. The financing plan for the Project is based on a September 1996 Opening up the sector to market forces and 20:50:30 equity: subordinated debt: senior debt involving the private sector have resulted in: ratio. Subordinated debt will be provided to GOP, to be earmarked for onlending to the Uch project · Hub (1,292 MW): Pakistan's first private power gen- through the PSEDF. The senior debt will comprise eration project, which recently commenced operation. of a commercial loan guaranteed by US Eximbank, · Eleven private power projects, with an aggregate ca- IFC `A' and `B'loans and a commercial loan to be pacity of over 3,000 MW, have reached financial clo- supported by the proposed Bank guarantee. This sure during the past year; was the first Bank guarantee operation co-financed · The restructuring and unbundling of WAPDA's genera- tion, transmission, and distribution facilities is taking with US Eximbank which has provided a Guarantee place; to commercial lenders for the construction period · The sale of a controlling 26 percent equity stake in the and `take-out'financing following commencement of 1,600 megawatt Kot Addu power plant to National commercial operations. The Lead Arranger and Power of the UK has been approved by the Cabinet; Underwriters of the Senior Debt Facilities are ABN · Financial advisors have been appointed for the sale AMRO and Deutsche Bank (Asia Pacific), Ltd, who "This financing package dem- oftheJamshoropowerplant,theFaisalabadAreaElec- successfully syndicated the US Eximbank Facility, onstrates how the Bank and tricity Board, and the Karachi Electricity Supply Cor- the Bank guaranteed Facility and the IFC `B'loan as poration; and part of the same financing package to a group of IFC, working together, can ef- · The creation of National Electric Power Regulatory international banks. Details of the financing plan are fectively combine their Authority. given below. strengths to catalyze private sector power and infrastructure Project Background Contractual Framework investments", Per Ljung, Chief of Energy & Project Finance The Government of Pakistan (GOP) issued a Let- The security structure for the project consists of a set Division in the South Asia De- ter of Support in 1991 and authorized the Sponsors of contractual agreements which defines the rights partment. to proceed with project development. In 1992, the Sponsors invited proposals from leading interna- and obligations of the major participants in the tional gas turbine equipment suppliers, on the ba- project. The Project related risks such as completion sis of which GE was awarded the EPC contract, and operation risks, including the gas reserve risk, particularly because of GE's experience with tur- will be borne by the sponsors and the lenders as well bines which burn low-to-medium Btu gas. GE sub- as the natural force majeure risks other than those sequently brought in the Harbin Companies related to either WAPDA and OGDC. Sovereign or ("Harbin") of China to form a consortium for both political risks are assumed by the GOP and its the power plant and a housing colony. A special agencies and are backstopped by the Bank's purpose company, Uch Power Ltd. (UPL) was in- Guarantee. These risks are identified and allocated corporated in Pakistan in July, 1994 to own and through the Project's contractual framework, which operate the Project. The Sponsors described be- comprises of the following main agreements: low are equity investors in the company: · The Implementation Agreement (IA) between UPL and GOP was signed on November 19, 1995. The GOP · Midlands Power International - MEP is a wholly-owned Guarantee of the payment obligations of WAPDA under subsidiary of Midlands Electricity plc, a UK-based Re- the PPA and of OGDC under the GSA constitutes an gional Electricity company which has a 40%stake in Annex to this Agreement. The IA grants UPL the right to UPL and is the largest shareholder. implement the Project and extends certain concessions · General Electric Capital Corporation (GECC) - GECC to the Company as well as defines each party'srespon- is a diversified financial services company, wholly- sibility during the construction and operation phases of owned by General Electric Company of the US, and the project. has an 18.4%of equity interest in UPL. · The Power Purchase Agreement (PPA) between UPL · Tenaska Inc - Tenaska, the lead developer of the and WAPDA was signed on November 23, 1995 by Project, is a privately owned company based in which WAPDA undertook to purchase the capacity and Omaha, Nebraska and specializes in developing, de- energy output of the Project for a period. signing, financing, owning, and operating cogenera- · The Gas Supply Agreement (GSA) between UPL and tion and independent power projects OGDC was signed on November 2, 1995, which pro- with a 30.3%share ownership in UPL. vides for the supply of gas from the Uch gas field to · Hawkins Oil & Gas Incorporated of the US - Hawkins, the Project for a period of 23 years. an independent oil and gas exploration and services · The Engineering Procurement and Construction company, has 8.5%share ownership in UPL. Contract (EPC) between UPL and subsidiaries of GE · Hasan Associates pvt Ltd. of Pakistan -Aprivate and of Harbin Companies of China was signed on development and construction company has a 2.8% February 10, 1996. The EPC is a fixed price and shareholding in UPL. date certain turnkey contract for the entire project in- Financing Structure cluding civil works. · The Operations and Maintenance Agreement (O&M) ProjectFinance between UPL and the Electricity Supply Board of 100% of its nominal value in the lending program andGuarantees Ireland, which has the necessary worldwide as the Bank's risk coverage extends to the whole exper- tise to operate and loan amount, albeit for certain specified risks as September 1996 maintain combined cycle gas tur- outlined above. bine projects, was signed on February 20, 1996. It Benefits of the Guarantee provides for operation and maintenance of the plant for a 23 year period according to specified terms and The Bank Guarantee fosters partnership with the technical criteria. private sector for the benefit of Governments, · Loan documentation comprising of: the Common Project Sponsors, and Lenders. The Uch Debt Agreement and the Facility Agreements be- tween UPL, the lenders and their agents; the Project Guarantee demonstrates such benefits: Funds Agreement between UPL, the sponsors, the trustee and the intercreditor agent; and the · Helped to mobilize funds for the completion of the IntercreditorAgreementbetweenallthelenders,their Project. agents and the intercreditor agent also constitute an · Catalyzed cofinancings of over US$600 million, integral part of the security package. whilst minimizing Bank support to only 11%of total Project Financing. · Helped to provide long term finance substantially Bank Guarantee beyond prevailing market terms for the country, with "The Uch loan demonstrates that positive impact on tariff levels. The Bank's Guarantee is designed to be triggered · Reduced financing costs significantly through the the partial risk guarantee is now a in the event of a debt service default that results credit enhancement. regular instrument of the Bank and from noncompliance by GOP of one or more of several other similar transactions are its payment obligations as outlined in the Project Bank Group Role in Pakistan's Private in the pipeline under this program for documents between UPL and GOP or one of its Power Initiative countriesinLatinAmerica,theMiddle agencies. Specifically, the partial risk guarantee East, and South East Asia", Richard will provide coverage for defaults on scheduled The role played by the Bank Group through Frank, World Bank Managing Direc- debt service payments of both principal and guarantee operations, the PSEDF, and credit tor. interest resulting from GOP's failure to meet its enhanced financings by IFC, has been an payment obligations under the IA and the GOP important factor in Pakistan's success in reaching Guarantee. There are five main categories of financial closure over and above its targeted risks covered by the Guarantee: 3,000MW of power project financings. Both the Bank and GOP have benefited from this · Breach of contract of governmental entities: GOP's partnership. So far as GOP is concerned, the guarantee of payment obligations of OGDC under regulatory framework has been further the GSA and of WAPDA under the PPA developed into the Power Policy Framework with · Availability and convertibility of foreign exchange: the Private Power and Infrastructure Board as a GOP's obligations as to the availability and convert- one-stop window for all project negotiations ibility of payments in foreign exchange under the IA between project sponsors and GOP. The risk and the GOP Guarantee in support of the PPA and allocation between GOP and the private sector theGSA has been refined, on the basis of which model · Changes in law in Pakistan: Any change in Paki- project documents (Fuel Supply, Gas Supply, stan law (including Sharia'a Law) which would cause Power Purchase and Implementation Agreements) GOP or UPL to be unable to fulfill their obligations have been developed as a framework for GOP or the lenders to enjoy or enforce their rights under support for International Power Producers (IPPs). the project agreements Given the increased experience of GOP with · Force Majeure events: These cover political private power projects as well as the greater events within Pakistan, and natural force majeure familiarity of investors and lenders with the events affecting WAPDA and/or OGDC; and country through the Hub Power Project and IFC- · Other GOP events of default: These cover events supported financings, the level of guarantee such as expropriation, creeping nationalization, and/ coverage in the case of Uch was reduced in or acquisition of a controlling interest in UPL. scope, reflecting the more limited contractual obligations of GOP compared with the Hub The Bank's Guarantee support is enshrined in a Power Project. Through greater risk sharing with Guarantee Agreement with the lenders which the market, the Bank was thus able to reduce its outlines the scope of the Bank's risk coverage level of overall support as well as its guarantee and defines the trigger mechanics of the Bank's coverage; thereby enhancing the role of the Guarantee. In parallel, the Bank has an Indemnity private sector. This was demonstrated by an Agreement with GOP, under which GOP counter- extension of the term of the Uch financing to 15 guarantees the Bank for any payments made years, beyond the 12 year term for the Hub under the Guarantee Agreement. A counter- Power Project, and a reduction in Bank support guarantee is a requirement of the Bank's Articles to around 12%, compared to Hub's 23%. of Agreement. The Bank's US$75 million commitment under the guarantee is recorded at For more information on the Uch Power Project ProjectFinance and the Bank's Partial Risk Guarantee, please andGuarantees contact Farida Mazhar, CAPPF (ext. 31235) or Per Ljung, SA1EF (ext. 81933). September 1996 THE ROLE OF THE WORLD BANK GROUP Government Partial Risk Commercial Guarantee of Pakistan Private Sector Energy Lenders (GOP) Administration Development Fund Agreement Implementation Inter Creditor Agreement GOP Agreement Long Term World Bank & Common Debt World Guarantees Credit Facility Facility Agreement Agreement Oil & Gas Commercial Bank Gas Supply Agreement Investment Development Uch Power Lenders: Agreement Guarantee Corporation Limited IFC B Loan Power Purchase Agreement Water & Power IFC A Loan Development Construction Equity Authority Contract Subscription Facility O&M Agreement Agreement Agreement Construction O&M Equity Consortium US Eximbank Contractor Investors GOP Entities Private Entities / ECA's World Bank Group World Bank Group Instruments UCH PROJECT FINANCING - (US$ 690m) IFC A Loan US US Eximbank Eximbank US$ US$ Guaranteed Loan 98 US$ 40 153 US$ Bank Loan 188 Uch Power Lenders World Bank of China US$ Limited US$ Guaranteed Loan 80 PSEDF US$ 75 303 Subordinated Commercial US$ 161 US$ US$ 10 World 75 Bank IFC B Loan Equity Investors All figures in millions To obtain a copy of the brochure, The World Bank Guarantee: Catalyst for Private Capital Flows, please call (202) 473-3045. Please direct editorial comments toAndres Londono, tel: (202) 473-2326.